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Searching for Sochi Gold -- in Stocks

The Sochi Winter Olympics have been generating controversy for months, but the real question for investors is not how smoothly and safely the event is produced, or how many medals nations win -- it’s simply how to profit from this fortnight of international competition.

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Friday’s Opening Ceremony officially starts a two-week period that has historically been kind for equities in the host nation, at least since 1994, when the Winter Olympics switched cycles to a two-year stagger from the Summer Games instead of staging both in the same year. Home-nation stock benchmarks have generated solid returns in four of those past five Winter Olympics, according to data provided exclusively to FOX Business by Sentimentrader.com.

The data also show most of the rallies had legs, moving higher for at least a week, even during down markets such as the U.S. in 2002. That brief respite from the dot-com implosion, however, was soon given back.

Despite the 80% rate of gains, Sentimentrader.com President Jason Goepfert is skeptical that there is a trader’s edge. “As for correlations, my opinion is that they’re spurious, at least in terms of the stock market of the entire country.”

As host nation, Russia will be trying to avoid joining Japan’s Nikkei 225 with stock losses. The Nikkei tumbled 4.9% while the Olympic flag fluttered over Nagano in 1998, although it did rally into the Games and for a week after the flame was extinguished. Still, posting even modest gains may be a tall order for Russia, as many emerging markets have already felt the agony of defeat a la Vinko Bogataj to start 2014.

Russia’s benchmark RTS Index is already down some 10% to start the year and traders say the pre-Olympics negative news flow is creating an overhang for the host nation’s markets. “People are eyeballing the angst,” says Dave Lutz who specializes in Cross Asset Macro Strategy as Head of ETF trading for Stifel Nicolaus. “In Russia right now, all the news is terrible -- the hotel rooms, the infrastructure, and safety concerns. They are not getting the same kind of (positive) hype as past Games.

“It works great (for local markets) when the excitement is showing off the best of the host country, but for Russia it’s mostly negative. Between the negative emerging market sentiment and the press reports, that could cap upside moves.”

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Lutz also says it’s not just sentiment, some traders are putting up big bucks just in case… “People have been buying massive puts on the RSX (Market Vectors Russia ETF) during the recent weakness. There’s a lot of concern over terrorism at these Games.” The put options would rise in value if the RSX declines.

Bill Wells, President of Pope Asset Management, invests in emerging markets, though he admits “we don’t invest in Russia” and “we don’t invest around the Olympics.” But Wells does think nations can get some long-term goodwill by proving their mettle as hosts on the world stage: “When people travel there and if they successfully pull off the Olympics -- and I think they will put on a good show -- it validates these countries in the minds of investors and increases familiarity with the country, which would relate to their securities. If they do it successfully, it will provide validation and may even change the way the country views itself. That may be what causes (stocks) to go higher.”

Quite a few individual stocks have brought home golden gains over the past several Olympiad. That means the stocks have risen in the two-week period while the Winter Games were being contested, four years apart, over at least a 16-year period.

Sentimentrader.com’s data show 11 large-cap names that have been public for at least the past four Winter Olympics have pristine records, posting gains each time. Goepfert says, “In terms of individual stocks, there could be some ‘spotlight effect’ bias going on, like we see with Nike in the Summer Games.”

Nike may be best known for its summer sports gear and inspired stock performances in fair weather, but the company’s stock performs like its namesake goddess of victory in colder climes as well. The athletic apparel maker has risen in each of the past five Winter Games. Meanwhile, shares of big-time Olympic “partners” (sponsors) such as Coca-Cola, McDonald’s, and GE have failed to get a consistent boost from their high profile.

The Gold for Olympic tie-in goes to Ralph Lauren, USA Olympic Team outfitter for a second straight Winter Games. The stock is unbeaten during the Winter Games since going public in 1997.

Tiffany has an even more sparkling record, rising during each of the seven Winter Games since its 1987 IPO (though keep in mind the seasonality as the Winter Olympics are held around Valentine’s Day).

Sentimentrader.com’s Goepfert points out there’s also a tool-time angle-- perhaps viewers/investors are inspired to build bobsleds? Or maybe they are inspired by Home Depot’s longstanding partnership with US Olympians and providing many of them with part-time jobs? Of course it’s also a time of year when builders and DIYers everywhere start stocking up for spring projects.

Snap-on has nailed 8 straight Winter Games increases, while Illinois Tool Works, and Caterpillar built gains in 7 out of 8.

Insurance company Lincoln National (LNC) and conglomerate Leucadia National (LUK) are also 8 for the last 8 Winter Olympics.

One other sidebar of note, Walt Disney has gained 7 out of the past 8 Winter Games even though its ABC Network hasn’t aired the sports spectacular in more than two decades. The network was a pioneer of Olympic broadcasting with the late Jim McKay setting the bar high for journalists and sports broadcasters alike.

If investors don’t see these random gains continuing or don’t have the stomach for buying Russian stocks through an exchange traded fund such as the Market Vectors Russia, (RSX) or direct investment, Pope Asset’s Wells has a different correlation to examine.

He thinks investors should pay closer attention to a small, Nordic nation that quadrennially outperforms bigger nations in the medals table and is forecast by some pundits to win the most medals in Sochi. “We like Norway,” though not necessarily because of their Olympic prowess. Pope explains: “Norwegian financials are our largest sector holding. We think they are undervalued at relatively low multiples and reasonably high dividend yields. In addition, the economy and the currency should do well given the surpluses and reserves being generated in Norway.”

The Global X FTSE Norway 30 (NORW) is a popular ETF, but Pope prefers the nation’s biggest financial firm—DNB. “Norway has historically done well in the Winter Olympics and this is a bellwether stock that may be a play around the Olympics. It’s our largest stock holding. Should Norway win a lot of medals you may get Norwegian stocks to trade up. More fundamentally, DNB reported fourth-quarter earnings (this week) that were up over 40% year over year.”